Australia today warned that a $6.7 billion natural gas project in the Timor Sea could be scrapped after East Timor rejected its latest proposal.

East Timor Prime Minister Mari Alkatiri said on Wednesday a third round of talks with Australia had ended without an accord on the project in an area where the maritime boundary was in dispute.

But Australia's chief negotiator, Department of Foreign Affairs and Trade deputy secretary Doug Chester, warned that the Greater Sunrise gas field development could be abandoned if no agreement was reached by Christmas on sharing $US30 billion in oil and gas royalties.

"The ball's in East Timor's court," Mr Chester told Australian Broadcasting Corp radio. "We've put forward a number of suggestions for a creative solution; they've been rejected."

Mr Chester said the two countries had been close to striking a deal but the East Timorese changed their negotiating position this week.

"We don't have any further ideas ourselves and it's now up to East Timor to come forward with some ideas," Mr Chester said.

Mr Alkatiri said what the Australians had offered "did not come even close to recognising our sovereign rights in the disputed areas".

"We were talking about Timor-Leste participation in the development of the disputed resources; they were talking about money," Mr Alkatiri said in a statement, using East Timor's official name. "We were too far apart to reach agreement."

Mr Alkatiri, however, said he was still willing to participate in negotiations.

The Sydney Morning Herald newspaper, citing unnamed Australian sources, said the East Timorese were offered about $3 billion in additional tax revenue in exchange for deferring discussions on settling a maritime boundary for 100 years.

Impoverished East Timor wants a maritime border midway between the two countries, which it argues would provide Dili with an extra $US12 billion ($16 billion) in total revenue.

Australia, however, wants the border it shared when Indonesia occupied East Timor, which followed the Australian continental shelf that at some points is only 150 kilometres from the East Timorese coast. That border puts most of the natural resources under Australia's control.

In July, Woodside Petroleum warned its $US5 billion Sunrise gas project in the Timor Sea would stall if the countries failed to resolve their dispute by the end of the year.

The latest talks had been aimed at achieving a solution to the dispute over resources, without setting a permanent maritime boundary, Mr Alkatiri said.